Ritchie *Still* doesn\’t get tax incidence

Third, there’s no evidence at all that companies can necessarily pass on all tax they pay to customers. If they can then it is very obvious that competition is not working – because if it were that would not be true. So free-marketeers can’t have it both ways. Either competition prevents generic passing on (generic VAT rises perhaps apart) of the fact that tax is passed on proves that monop[oly power is in operation and a bigger issue arises of tackling it.

Ever since Seligman (in 1899 for fuck\’s sake, think it would have sunk in by now) the question has not been how much of corporation tax gets paid by customers. It is how much gets paid by the workers in the form of lower wages and how much by shareholders in the form of lower returns to capital?

And we know what the defining factor is too: the relative mobility of capital and labour.

What makes Ritchie\’s position on this so damn fucking stupid is that if he actually paid attention to what was being said (rather than the voices in his head) then he would realise that this simple and obvious truth actually bolsters part of his case.

The way to make sure that shareholders, capital, actually bear the incidence of corporation tax is to do one of two things.

1) Impose capital controls so that capital can only be invested domestically.

2) Have a single worldwide corporation tax base and tax rate.

I\’ve definitely seen him argue for the first and he\’s similarly certainly implied the second.

Either would mean that capital, not workers, bear the incidence of corporation tax. If he would just manage to grasp the simple thing that all economists are shouting at him he would therefore have a good argument to do either of these two things that he wants to do anyway. But no, he prefers to wallow in ignorance on the point and thus miss an argument he could use to his own benefit.

Loon.

And finally, if real markets existed then shareholders would pay the cost of extra tax just as right now the benefit of that abuse does not flow to customers but goes instead to shareholders.

Dear God, you stupid boy. It is that there are markets, different markets with different tax levels, for capital which means that capital does not carry the full burden of corporation tax. That\’s why, to make them do so, you have to eliminate those markets: either stop them moving to another market with capital controls or remove the market by having one global corporation tax.

He\’s got entirely and absolutely the wrong end of the stick.

13 thoughts on “Ritchie *Still* doesn\’t get tax incidence”

  1. but everybody knows that the model of perfect competition describes very few real world markets, hence producers have some degree of monopoly power. This is not something that needs “tackling” – there’s a big difference between owning a monopoly and having some pricing power.

    and you can’t just parenthetically throw in “apart from VAT” – you have to explain how you can go from believing that, for example, alcohol taxes make alcohol more expensive for consumers, to denying that transaction taxes make transactions more expensive.

  2. Luis, nobody believes in “perfect competition”, least of all free-market fanatics. Everybody understands that the benefit of market systems is they tend towards/seek perfection but never ever get there, not even close, not within a country mile, and if they ever did get there it would be a bizarre world, like Frank Knight’s fantasy of people transacting “like vending machines”. Markets work precisely because they function better than any other system under real world conditions of imperfect knowledge, imperfect rationality, etc etc.

    The point is, you can’t do better than the market system in terms of economic efficiency (you might be able to do better in ethical terms if your ethics prefer a less economically efficient outcome, for moral reasons, e.g. with healthcare or caring for the severely disabled). But nobody believes it is perfect. The whole “perfect competition” criticism is a straw man.

    Producers, consumers, workers, rentiers, all can under different particular conditions exert some degree of monopoly/cartel power. They can also be the victims of it by others. The error every authoritarian correctionalist makes is to presume they can objectively quantify that, and what’s even more crazy, believes that they fix it.

  3. Ian you have got the wrong end of the stick. All I did was point out that pricing power – which enables firms to pass taxes on to consumers – is pervasive and no big deal.

  4. Luis

    There is a sneaky angle there…when Tesco introduced their loyalty cards, they implicitly accepted a lower profit margin than their competitors but hoped to gain market share at thier expense – which duly materialised. Now most supermarkets offer these loaylty schemes.

    My thinking is that Tesco adopted an extra tax but did not pass it on to anyone – prices to customers remained the same, and turnover increased so no impact on workers nor on shareholders.

    All that the Murph-meister needs is a similarly collaborative model of taxation!

  5. Luis.

    Does Market power actually affect the incidence of tax anyway? I mean, market power is a pre-requisite to raise prices above marginal cost, sure. But a tax increase (like the FTT) is a raise IN marginal cost, and so passing it on is not a raise above marginal cost, and thus shouldn’t require any market power, no? It just about the relative supply and demand elasticities?

    In fact, if anything, I’d expect monopolists to pass along less of the tax increase. By definition, they are pricing on the elastic part of the demand curve, and they are hit fully by any reduction in demand caused by a tax driven cost increase. So a monopolist probably has a great deal more incentive to suck up the incidence of a tax, and maintain demand, than a competitive firm does.

  6. Just taking the title of your post it occurs that possibly Murph’s incapable of understanding tax incidence.
    He doesn’t seem a very practical person & I had problems with customers like that. I end up saying “Look, I can’t make water flow up hill. ” or “No, that can’t go there because at this point it’d have to be occupying the same space as this thing here.” And I’d know that they still don’t get it.
    Murph’s whole career he’s been dealing with rules that are extrinsic from the system he’s working in. Accountancy, tax, law, they’re not natural systems. The rules are arbitrary. Imposed by ‘wise’ men to achieve what ‘wise’ men want to achieve.
    I don’t suppose he did much like economics at university. Must be unsettling to a mind like that to confront rules that are intrinsic to the system. A practical person coming up against a problem will appreciate that there are fundamental rules operating that you just can’t argue with. The water will not flow from here to there because there is higher than here. To Murph, Seligman’s discovery in 1899 is the ‘rule’ of a ‘wise’ man. He feels himself a wise man now so he can change the rule. He doesn’t really appreciate that the ‘rule’ was there before Seligman. Seligman only identified it.
    I don’t know how all this ties in with religiosity. That’s more ian b’s territory. I do know that mindset seems to sit well with people who have systems for roulette, talk about destiny. They don’t seem to much like the idea that the natural world’s not much interested in our opinions.

  7. blokeinspain: I shouldn’t think religiosity has much to do with it. The obvious point of contact is the rules which govern the Universe. But regardless of whether you’re religious, those rules are still, from a human point of view, as though written on tablets of stone. Other rules, like Acts of Parliament, can change with a Division and an Assent.

    There’s a spectrum in between: the question is where social functioning fits in. Is it towards the physical laws end — mutable but slowly and uncontrollably — or the Act of Parliament end — mutable easily and controlledly?

    We, of course, say the former, and reason that social functions derive from a human nature which is hard to change; Our Murph, in common with all Utopianists, say the latter. Perhaps they have some different account of the role of human nature with respect to society’s operation, but certainly we tend to hear them saying that human nature is comparatively easy to change.

    Religion, I expect, has little to do with that underlying discussion: there are equally good reasons, from different religious and non-religious positions, to conclude that human nature is, or is not, quite malleable at our own hands.

  8. In terms of religiosity, I would take the view that Murphy’s perspective is characteristic of, but not unique to, a particular strand of Protestantism. What I mean by that is, one might say that authoritarianism is characteristic of Prussians, but there are other peoples in the world who are also authoritarian culturally.

    I think Bloke In Spain’s analysis in the above comment is pretty damned sound.

  9. Unimportant Quibbler

    My pretty damned sound gold star of the day goes to Philip Walker. The essential point is whether an Act of Parliament, or other change in our administrative rules, can cause our society to function in a different way and exhibit different behaviour at a macroscopic level (what we might call different “Laws of Society” or “Laws of Economics”). It’s fair to say many such “Laws” apply only in the context of modern Western society; in alternative systems they do not yield such great predictive power or may even be entirely meaningless (e.g. in pre-currency societies, the economics of the money supply are irrelevant).

    Ritchie seems to believe that much of conventional economics is ultimately going to prove irrelevant once he constructs his utopian Courageous State – this new epoch will simply change the framework of society so much that different laws will be apply. However since he still is aiming for a mixed economy rather than a communist or money-free state, I suspect his ignorance is at his own peril.

  10. He’s got it the wrong way round anyway. In a competitive market a common cost increase will feed straight through to higher prices. Immediately for an increase in marginal costs, via exit of some firms for an increase in fixed costs.

    It’s first year micro. I thought he did the first year?

  11. I’m very far from being an economist but it’s obvious to me that many of the fundamentals of economics extend far beyond the realms of commerce. Darwinian evolution, a skein of migrating geese sharing aerodynamic lift, why the geese migrate in the first place, an ants nest, anywhere where you have an organism however sophisticated that’s capable of exercising choice those fundamentals are operating. If there is an analogy for tax incidence in the natural world it’s beyond my abilities to identify it but it would be no surprise if it existed.
    My experience is that some people can never come to terms with this. That simple, fundamental rules can give rise to complex systems. Their world requires a Maker. That prayers to saints or Marx can annul gravity & faith enable them to walk on water. Like I said, they expect the natural world to take notice of their opinions.

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